When looking to diversify your portfolio, think internationally

A key principle of investing centers on the idea of “diversification.” That is, very generally, that because different types of investments react differently over time to broad market influences, investors may realize better performance across all market cycles if they hold a variety of types of investments. This includes stocks in different sized companies as well as bonds, Treasury securities and cash.

Another important way to diversify is through investing in international securities – a method often overlooked by investors, either through fear of undue risk or lack of opportunity. Over time, international markets often perform differently, or in what analysts call a “non-correlated” fashion, to U.S. markets. This can be due to, among other things, varying currency valuations, differing economies or fluctuating demand for products globally. Additionally, there are a multitude of companies headquartered internationally that may offer attractive earnings potential for investors. Put simply, increasing your choices increases your chances of finding good investment opportunities – ones that you may not be exposed to solely through domestic stocks or domestic index mutual funds. Here are some major points to consider as you look at ways to bring greater diversification to your investment portfolio:

• Over time, economic cycles internationally and domestically have performed differently, and thus generally bring about different performance of respective stocks and bonds. At different points in time, domestic and international stocks have outperformed, so it may be of interest for investors to gain exposure to both.

• There are many rapidly growing or developing markets across the globe, offering potential in a variety of industries outside the U.S. If you’re a long-term investor, the international markets offer potential for growth over time.

• While choosing stocks or bonds from among the tremendous variety of international companies can be daunting, there are many mutual funds that specialize in different types of international investments, including small, mid-sized and large companies that focus on specific sectors, or those that offer exposure to both stocks and bonds. Many investors choose internationally focused mutual funds as a way to gain broad, long-term exposure to international investments. (Mutual funds will fluctuate in value, and an investor could lose money by investing in mutual funds.)

• International investments may offer certain risks due to currency fluctuations, economic instability and/or political changes. But when combined with domestic investments in a portfolio, they can potentially offer additional opportunities for long-term growth. Financial advisors agree that a well-diversified investment portfolio offers the best chance of stable and long-term performance. Talk to your financial advisor today about your choices and your long-term investment goals.

Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing.  For a prospectus containing this and other information for the mutual funds offered by Waddell & Reed, call your financial advisor or visit us online at www.waddell.com.  Please read the prospectus carefully before investing. 

Diversification will not ensure a profit or guarantee against a loss in a declining market.  It is a strategy used to help manage risk.

The preceding article was provided by James Slaughter and is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation.  Please consult your financial advisor prior to making financial decisions.  James Slaughter is a Financial Advisor with Waddell & Reed and can be reached at 916-566-0975 x 105. Waddell & Reed, Inc., Member FINRA/SIPC.